Terry and Kathryn A. Roditski Dilozir - Page 7

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          claimed a bad debt deduction on Schedule C in the amount of                 
          $1,000 relating to the surrendered deposit.  Upon examination,              
          respondent disallowed the claimed bad debt deduction, asserting             
          that petitioners had not established that the forfeited deposit             
          constituted a bad debt or was otherwise deductible.                         
               As a general rule, section 166 allows a deduction for any              
          bad debt that becomes worthless during the taxable year.  Sec.              
          166(a)(1).  To establish entitlement to a bad debt deduction, a             
          taxpayer must prove that a bona fide debt existed, and that the             
          debt became worthless in the year that the deduction is claimed.            
          Rule 142(a); American Offshore, Inc. v. Commissioner, 97 T.C.               
          579, 593 (1991); sec. 1.166-1(c), Income Tax Regs.  A bona fide             
          debt is defined as one which arises from a debtor-creditor                  
          relationship based upon a valid and enforceable obligation to pay           
          a fixed or determinable sum of money.  Sec. 1.166-1(c), Income              
          Tax Regs.                                                                   
               Petitioner admitted at trial that his deposit was properly             
          surrendered, and that he was not entitled to a return of the                
          proceeds.  Therefore, the forfeited deposit did not give rise to            
          a claim for a bad debt deduction under section 166.                         
               Upon petitioner's admission at trial that he was not                   
          entitled to a return of the deposit, we asked petitioner to                 
          explain the basis of characterizing the forfeited deposit as a              
          bad debt.  In response, petitioner stated:  "I expended [the                
          deposit].  I -- I spent the money in trying to pursue a                     




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